Attempts at Relief and Reform

Can No Down Payment Loans Ever Make Sense?

Posted on Tuesday, September 7, 2010

The Affordable Advantage, available to first-time home buyers in four states and created in conjunction with the states’ housing finance agencies is aiming to prove they can. But according to FNMA, the program is expected to stay small.

The loans are 30-year fixed mortgages, with mandatory homeownership counseling, available to people with credit scores of 680 and above (720 in Massachusetts). The buyers have to put in $1,000 and must live in the homes.

Some will argue that throughout the foreclosure crisis, the state agencies continued to make loans with low down payments, often to borrowers with tarnished credit, with much lower default rates than comparable mortgages from commercial lenders or the Federal Housing Administration. The reason? The agencies did not offer adjustable rates, and they continued to document buyers’ income and assets, which many commercial lenders did not do.

So far Idaho, Massachusetts, Minnesota and Wisconsin are offering the loans. The agencies buy the loans from lenders, then sell them as securities to Fannie Mae. Because the government now owns 80 percent of Fannie Mae, taxpayers are on the hook if the loans go bad. The state agencies oversee the servicing of the loans and work with buyers if they fall behind, potentially another mitigating factor.

The bottom line? No down payment loans can make sense if handled with caution. But it doesnt take a genius to spot the potential for problems once word gets out.

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